Many Sussex graduates could face skyrocketing student loan interest rates

The Institute for Fiscal Studies has said today’s reading of inflation means the maximum interest rate, which is charged to current students and graduates earning more than £49,130 will rise from the current level of 4.5 per cent to 12 per cent for half a year unless policy changes.

This would mean that with a typical loan balance of around £50,000, a high-earning recent graduate would incur around £3,000 in interest over six months.

The interest rates for low earners would increase from 1.5 per cent to nine per cent.

These would apply to English and Welsh graduates who took out a student loan since 2012.

The maximum student loan interest rate is then likely to fall to around seven per cent in March 2023, the IFS says, and fluctuate between seven and nine per cent for a year and a half; in September 2024, it is then predicted to fall to around zero per cent before rising again to around five per cent in March 2025.

It says these ‘wild swings’ in interest rates will arise from the combination of high inflation and the fact an interest rate cap takes half a year to come into operation.

The high rate of inflation reflects the huge rise in the cost of living over the past year, but the IFS has questioned why the rate is vastly more than average mortgage rates but also more than many types of unsecured credit.

An IFS spokesman said: “Student loan borrowers might legitimately ask why the government is charging them higher interest rates than private lenders are offering.”

While the high interest rates are set to come into force in September, under the current system there would be a six-month lag between rates exceeding the cap and the rate actually being reduced.

This way of implementing the repayment cap would typically benefit those whose loan balances are rising over time, while borrowers whose balances are falling over time will typically lose out.

According to Save the Student, those who started university between 1998 and 2011 will likely see their interest rate stay at 1.5 per cent, as it is calculated on whichever is lowest of the Bank of England’s base rate plus one per cent or RPI.

Tom Allingham, Save the Student’s head of editorial, said: “At a time when students and graduates alike are having to contend with huge increases in the cost of living, today’s RPI announcement is yet another blow.

If implemented, a maximum interest rate of 12 per cent would massively exceed the previous Plan 2 high of 6.6 per cent and represent an almost threefold increase on the current top rate. For lower earners whose loans accrue interest at the rate of RPI only, the use of March’s figure would mean that, come September, their interest rate will be six times higher than it is now.

“It’s worth noting that, as graduates only ever repay a percentage of their earnings over a threshold, any change to the interest rate won’t affect the amount people repay each month. However, higher interest rates do mean larger overall debts, which in turn means the loan takes longer to repay for those who may otherwise have done so earlier.

“Another important factor is that when the government determines that the interest rate on Plan 2 Student Loans is higher than that of comparable unsecured commercial loans, it can and will cap it at what they call the Prevailing Market Rate. They have done this in the past year, however the decision affecting this new rate of RPI won’t be taken until August, leaving months of uncertainty in between.

“Disappointingly, the government also failed to answer some of our key questions that would have helped us inform young borrowers of exactly what the possible outcomes are. We’d strongly encourage them to publish some clear guidance at the earliest possible opportunity to help reassure students and graduates that their loans won’t be with record-smashing interest rates.”

For more information visit Save the Student’s website